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Directors face tougher Penalty Notice Regime

Company directors are facing increased obligations and responsibilities across a range of fronts. Recent amendments to the "Director Penalty Notice Regime" strengthen directors' obligations to cause their company to comply with its liability to pay certain company liabilities. The amendments expand the regime to include liabilities to pay superannuation guarantee amounts and remove the ability for directors to extinguish personal liabilities to pay penalties where the penalty has remained unpaid and unreported for more than 3 months.

This article reviews some of the fraudulent practices carried out by directors in attempting to avoid liability, and looks at the long overdue reforms set to change the industry and the personal liability of a director forever.

Mark Tierney, Executive Lawyer, Bartier Perry

One of the main aims of the amendments to the "Director Penalty Notice Regime" is to reduce the scope for companies to engage in fraudulent phoenix activity. Phoenix activity poses a significant threat to employee entitlements, government revenue and the economy as a whole.

In its most basic form, a fraudulent phoenix company is used to intentionally accumulate debts and is then placed into voluntary administration or liquidation to avoid paying those debts. The business then re-emerges as another corporate entity, controlled by the same person or group, but free of debt.

The position prior to 29 June 2012

In 1993, the Director Penalty Notice Regime was introduced in the Taxation Administration Act 1953 (TAA) to assist the Commissioner of Taxation to recover certain company tax liabilities.

The policy objective was to ensure that directors caused their company to meet certain tax obligations or promptly place the company into liquidation or voluntary administration. Under the tax laws, companies have an obligation to withhold amounts from certain payments they make, such as wages to employees. There is a further obligation to pay those withheld amounts to the Commissioner (and to pay estimates of those amounts where applicable).

The Director Penalty Notice Regime makes directors of companies who fail to comply with their obligation to pay amounts withheld under the PAYG withholding regime to the Commissioner, personally liable for the amount that the company should have paid, through the imposition of a penalty.

Where the company fails to pay such amounts, the directors become automatically personally liable to a penalty equal to the amount the company should have paid at the end of the day on which the company is due to meet its obligation. However, the Commissioner must not commence proceedings to recover a director penalty until 21 days after he gives the director a written penalty notice.

A director can extinguish his or her personal liability by paying the debt or appointing an administrator or liquidator to the company within that 21-day notice period.

If the director does not take the appropriate steps within the 21-day period, the Commissioner may commence proceedings to recover the penalty. Certain defences are available to a director in such proceedings including:

  • if the director had an illness that prevented him or her from participating in the management of the company, or
  • if the director took all reasonable steps to ensure compliance within the notice period.

The Action Against Fraudulent Phoenix Activity proposal paper, which was released by the Government for public consultation on 14 November 2009, set out a number of taxation law and corporations law options addressing fraudulent phoenix activity. The paper concluded that the director's ability to put-off payment of the penalty until they receive a notice, and then to avoid liability absolutely by liquidating the company, was a significant limitation on the effectiveness of the Director Penalty Notice Regime.

As a result, it was considered that the law required amendment to toughen the regime.

The new law

Over 2 years of industry debate on the issue came to a head on 29 June 2012, when the Tax Laws Amendment (2012 Measures No 2) Bill 2012 received Royal Assent. The amendments commenced on Royal Assent, that is, on 29 June 2012.

This new legislation has amended the TAA by:

  • extending the Director Penalty Notice Regime to make directors personally liable for their company's unpaid superannuation guarantee amounts;
  • ensuring that directors cannot discharge their director penalties by placing their company into administration or liquidation when PAYG withholding or superannuation guarantee remain unpaid and unreported for 3 months after the due date; and
  • in some instances, making directors and their associates liable to pay PAYG withholding non-compliance tax (effectively reducing credit entitlements) where the company has failed to pay amounts withheld to the Commissioner.

Accordingly, if a director penalty has been outstanding for 3 months when a director is served with a director penalty notice, the director will no longer be able to remit that penalty by placing the company into administration or liquidation. The director will remain personally liable to pay the amount of the penalty.

The new legislation also changes the way the Commissioner can collect tax under the Director Penalty Notice Regime. Where a company fails to pay PAYG withholding amounts, the Commissioner has discretion to reduce a director's entitlement to PAYG withholding credits which can effectively increase the amount of tax that a director will have to pay when they complete their personal tax return.

New directors will be liable to a director penalty only where they become a director after the company has failed to meet its obligation by the due date and 30 days after becoming a director, the obligation has not been met. This is an increase in the grace period for new directors from 14 days under the old regime.

The new laws also allow the Commissioner to serve a director penalty notice by leaving a copy or posting it to the address of the director's registered tax agent.

Directors still have the same defences available and therefore will be able to avoid personal liability if they can prove that due to illness, they were not involved in the management of the company or they took all reasonable steps to ensure the company complied with its obligations in respect of PAYG withholding and superannuation guarantee amounts.

Directors must be on the ball

Directors must now more than ever be vigilant in ensuring that PAYG withholding and superannuation contributions are paid by the company on time.

If directors believe that the amount cannot be paid, then in order to avoid any personal liability for those debts, the director must place the company into administration or liquidation within 3 months of the due date.

New directors appointed to companies will need to quickly become familiar with the company's accounts and take appropriate action within 30 days of their appointment if the company has outstanding PAYG withholding or superannuation contribution amounts.

Directors no longer have the luxury of waiting until a director penalty notice is served on them before taking appropriate action to extinguish their personal liability in respect of the penalties.

Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please:

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Lawyer in Profile

Andrew Wright
Andrew Wright
+61 3 9258 3362

Qualifications: LLB (Hons), BCom, University of Melbourne

Andrew is a Partner in Maddocks Tax and Structuring team. He has significant experience in advising Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.

Andrew regularly provides advice on:

  • structuring of businesses and transactions,
  • mergers and acquisitions,
  • sale of businesses,
  • corporate reorganisations,
  • fixed and discretionary trust deeds, and
  • international tax structuring.

His advice covers both direct and indirect tax considerations.